One area of Europe’s new issue structured finance market that has come back with a bang in 2013 is commercial mortgage-backed securities. New deal volume reached €5.4bn in the first six months of the year, comfortably outweighing 2012’s year-end total of €3.2bn, according to Standard & Poor’s.
A sizeable chunk of that first half total came from the Luxembourg-based real estate firm Gagfah (Gemeinnützige Aktiengesellschaft für Angestellten-Heimstätten). The company successfully refinanced about €3.25bn worth of debt in the CMBS market, putting it at the forefront of European CMBS — an often-tricky corner of the securitization market which has followed a patchy, stop-start pattern of new issue activity in the years since the financial crisis.
Gagfah specialises in property rental and management, with a particular concentration on Germany, where it has 144,046 residential units on its books. This focus has allowed the firm to gain a foothold this year and tap the surging appetite among investors for CMBS deals backed by German multifamily properties, seen as a safe and stable asset class.
“Our experience with CMBS has been clearly positive,” Gerald Klinck, Gagfah’s chief financial officer, says of the firm’s activity in the market this year. Most of the firm’s new loans are in CMBS structures, while the smaller remainder are bank loans, including some larger loans to an entire subsidiary, and some asset-by-asset smaller loans.
This year’s positive CMBS experience Klinck talks about began in April with Taurus 2013 (GMF 1), which was brought to market by lead managers Bank of America Merrill Lynch and HSBC. The deal was underpinned by a €1.06bn loan originated by BAML in February and secured on Gagfah’s pool of 37,000 multifamily housing units in Dresden, known as the WOBA portfolio. That loan replaced part of an earlier debt facility on WOBA that was due to mature in May and which was originally carved up and securitized in two pre-crisis deals, Deutsche Bank’s Deco XIV and Lehman Brothers’ Windermere IX.
Gagfah was also the underlying borrower and sponsor in German Residential Funding 2013-1, which reached the market in June this year with Goldman Sachs and BAML as lead managers. The deal, the largest CMBS transaction in Europe since 2008, securitized a €1.998bn five year loan on a 75,000-strong portfolio.
In both cases Gagfah was able to generate substantial savings on the new coupon — WOBA being 99bp lower than the previous loan, GRF 156bp lower — which underlines the importance of CMBS as a key funding tool for the firm, Klinck says. “The CMBS structure allowed us to achieve very attractive coupon rates that we would not have been able to generate through any other source of funding available to us. In addition, amortization schemes are usually more favourable in the case of CMBS.”
Reaffirming its appetite for the securitization market, he reveals that the vast majority of loans refinanced by Gagfah this year — and those upcoming in 2014 — will also be done via CMBS structures. Another large refinancing of three separate German multifamily loans, previously securitized in Deutsche Bank’s DECO 2007-E7X, will take the form of an imminent €700m securitization for part of its 2014 maturities. “We are confident that we will refinance this loan amount at a better coupon as well,” Klinck says, pointing to the solid investor demand for its previous two deals.
He says the difference with CMBS now is that newer structures are much more transparent than a few years ago. He notes that previous deals were often bundled together with other debt, whereas the new CMBS are more like straightforward corporate bond encumbered by assets.
And what of some of the challenges posed by other forms of funding to securitization, specifically for borrowers such as Gagfah as the market heads into the latter part of the year?
“While the preparation work and the amount and detail of data to be provided are rather comprehensive, CMBS is for us the funding type that offers the lowest coupon rates,” he says. “One must also keep in mind, however, that generally speaking, banks are more flexible with respect to change processes and you have a direct contact you can go to for decisions, as they have the financial risk on their balance shaeet. With CMBS structures, you have the servicer, which is often not in the position to make similar decisions, so that’s can be a bit more challenging.”
Yet Klinck is buoyant on the prospects for the market. “The window of opportunity for CMBS is clearly open these days,” he says. “We saw that with the strong demand for both the WOBA and the GRF CMBS, especially from international investors. The funds are available and CMBS backed by German residential assets offer an attractive risk/return profile that is rather difficult to replicate for most other asset classes.”